I've been thinking a lot about this as well, and the short of it is that the tvout solution is not outputting touch, which is needed one way or the other... you gotta see what you are touching, and it doesn't do those things together
the vnc solution, however, has potential. a touchscreen can map a mouse pointer to your touch, so it's like you moved to a spot and could click. This would allow you to control it via the touchscreen while looking at the touchscreen and not looking at the iphone... in essence, expanding the display on your phone.
You do, however, need to jailbreak, because all the vnc on the app store are vnc clients... that is, you can connect to another machine running vnc, and really, you need to connect to the iphone from another computer.
This could be done pretty easily with a thin client with wifi that has a very small version of linux, a low end processor, and a CF memory card. I've personally put linux on less than 100 megs, and I'm pretty sure you can get the vnc client on there in less than 256.
At this point, you might use a OBD2 wifi ad hoc network (like you would use with Rev). You start the car and the obd2 starts the network. the thin client boots, likely with a fixed IP. It has a start up script that searches the network for other hosts, excluding the obd2, with vnc running, or you point it at a specific IP and make the vnc connection.
You can find extremely small linux machines that would be appropriate for less than $250. You need almost nothing to run this.